Climate Change and Economic Growth in a Rain-Fed Economy: How Much Does Rainfall Variability Cost Ethiopia?

Abstract

Climate change may impact economic growth through rainfall variability. This paper, using a simple growth model, demonstrates that the adverse impact of rainfall variability on economic growth depends on the rate of expansion of the amplitude of rainfall variability and frequency of occurrence of extreme events. A co-integration analysis using time series data from Ethiopia shows both inter-annual and within-annual rainfall variations have negative effect on growth. Simulation results on the forgone growth due to rainfall variability for the last five decades implied that mitigation and adaptation strategies towards climate change that reduce the impact of rainfall variability would put Ethiopia on a higher trajectory of growth.

Keywords: Economic Growth, Rainfall Variability, Capital, Ethiopia

JEL Classification: O41, Q54